UK banks ordered to hold more capital as consumer debt surges

by: Jill Treanor, The Guardian

The Bank of England is to force banks to hold more capital in the face of rapid growth in lending on credit cards, car finance and personal loans.

The intervention by Threadneedle Street, which could amount to banks needing £11.4bn of extra capital in the next 18 months, is one of a number of measures intended to protect the financial system from the fast pace of growth in consumer finance.

In addition to increasing the capital requirements, the Bank said it was bringing forward the part of the annual stress tests on banks which scrutinises their exposure to consumer credit. This will now take place three months earlier, in September.

The Bank of England’s Prudential Regulation Authority and the City regulator, the Financial Conduct Authority, will also publish next month how they expect lenders to treat borrowers in the rapidly growing market.

While the Bank found risks to financial stability were neither “particularly elevated nor subdued” it warned that there “pockets of risk that warrant vigilance”.

“Consumer credit has increased rapidly. Lending conditions in the mortgage market are becoming easier. Lenders may be placing undue weight on the recent performance of loans in benign conditions,” the Bank said in the financial stability report.

All components of consumer credit have been growing faster than the rate of growth of the economy, at more than 10%. Within that car finance has been rising 15%, credit cards 9% and personal lending 7%.

In March, the Bank highlighted consumer credit as a greater risk than buy-to-let mortgages. At the time, it said that last year banks had £19bn of impairments on credit cards, compared with £12bn on mortgage loans. It said it was launching a review into the credit quality of new lending – underwriting standards and the risk models used by banks – and said it would scrutinise these findings over the coming months.

The City regulator, the Financial Conduct Authority, has announced a raft of measures to help people in credit card debt, including waiving or cancelling interest and charges if customers cannot afford to curb their liabilities through a repayment plan.